Sondrel (Holdings) Plc appears to be in recovery mode after receiving a funding lifeline, prompting some investors to look again at the UK chipmaking junior.
Before Tuesday’s 50% rally, Sondrel was down close to 90% over the past twelve months, with the company’s cash flow squeezed after delays to some orders.
Despite several months in the doldrums, Sondrel has form for high-profile share moves.
You may remember the AIM-quoted company’s brief moment in the spotlight this February, when rumours circulated of Sondrel’s involvement in Elon Musk’s brain-computer interface Neuralink.
Market whispers had it that Musk called on Sondrel to lend its highly specialised knowledge of bespoke microchip designs to Neuralink, which was successfully implanted into a patient's brain for the first time that month.
Sondrel largely ignored the fevered news cycle, offering a vague statement calling itself “one of only a few companies capable of designing and supplying higher-spec, complex chips built on the most advanced semiconductor technologies”.
“The group does not comment on the identity of customers,” stated Sondrel at the time.
While this was happening, Sondrel shares rocketed higher on the mere idea of a British small-cap securing none other than Mr. Musk as an interested party. As with most speculative rallies, shares quickly corrected in the coming weeks.
Regardless, the rumour mill was not nearly enough to recover the lost market value Sondrel suffered in August 2023, when its share price collapsed from 56p to barely 21p in the space of a day.
The drubbing came after disclosing a trio of project delays for its bespoke application-specific integrated circuit (ASIC) designs.
Three of Sondrel’s ASICs customers pushed their deliveries back between six to 12 months, citing increasing inflation and decreasing end-market demand for Sondrel’s technology.
Profit warning sirens were triggered and by the end of the year, Sondrel’s valuation had collapsed more than 90%.
Which brings us to today.
ROX enters the chat
Sondrel stock soared more than 60% in opening Tuesday exchanges and while there remains an ocean between now and this time last year, could we be witnessing a turning point?
The incremental value recovery came after Sondel announced a conditional funding round and board shake-up that could fundamentally change both its management and ownership structure.
Sondrel conditionally raised £5.6 million from a private equity firm called ROX Equity Partners, which will see ROX seize 49.29% of control of the business.
Notably, Sondrel asked existing shareholders to waive Rule 9 of the Takeover Code, thus precluding ROX from having to make a mandatory offer to the existing shareholder base.
This means ROX is unable to seize the entirety of Sondrel’s share capital (or to look at it another way, this means ROX will not be forced into seizing the entirety of Sondrel’s share capital).
As part of the financing deal, ROX seeks to replace the board as part of a comprehensive management shake-up.
Nigel Vaughan will step down as non-executive chairman, chief executive David Mitchard will step up as chairman and continue as CEO until a replacement is found, and Fred Walsh, a managing director at investment bank Stifel, will also join the board as a non-exec.
Commenting on this transformative financing round, Sondrel stated: “The company requires the fundraising in order to continue to operate.
“The net proceeds of the fundraising (assuming the regulatory approvals are received), will be used to settle existing creditors, meet the company's immediate working capital requirements and execute the transformation plan as announced on 28 March 2024.”
The tone of the statement suggested that this financing deal was a do-or-die moment for Sondrel to iron out a kink in the cash-flow hose.
But putting that aside, could Sondrel find a new lease on life with this fresh injection of capital?
Ready for a repricing
The squeeze on Sondrel’s valuation came at a time of heavy inflation and reduced end-market spending. It is becoming clearer that the inflation cycle has peaked and is on the way down.
Current consensus analyst forecasts have revenues clocking in at £10 million for the current financial year, yet Sondrel’s market valuation barely scratches £6.5 million.
In a February update, Sondrel said: “Significant new ASIC business opportunities are in final negotiation for project start in early 2024 and indications remain encouraging that European and US market demand for Sondrel's turnkey ASIC services is strong.”
Furthermore, Sondrel, in that eventful profit warning, cited a contract with an 'automotive Tier 1 supplier', said to be worth between £10 million to £100 million a year.
If these pledges are met, expect a repricing to follow.